Turns out unsurprisingly the fast developing world of bitcoin that someone is already working on this and it goes under the name of bitcoinx.org.What they are working on will allow people to use the features of bitcoin for the foundations of their own virtual instruments of trust, eg private credit, bonds, stock certificates etc.It works by using vey small denominations of bitcoins and "colouring them" which is to give them an identifier to show that they are being used as a virtual receipt or recognition of other value for something other than bitcoin.

The idea that I am most interested in is to create coloured bitcoins that are pegged to a fiat currency, mine being the pound sterling.

The reason why this is interesting is because if there were coloured bitcoins that were pegged to the UK pound that people could trust, then this would pave the way for a future decentralised atomic transaction exchange which currently doesn't exist. Currently one of Bitcoins biggest vulnerabilities is that its largest exchange MTgox is centralised and therefore open to attack from those who's interests it doesn't favor.

Trusted receipts generally become more used than what they are receipts for.Gold receipts evolves in to paper moneyPaper money evolves into electronic credit money.

(I will now refer to a low denomination of coloured bitcoin that is pegged to the UK pound as poundcoin.)

Now the most obvious way to do this would be to set up a website that would let people buy poundcoin with UK pounds on a 1:1 exchange rate. The website would be trusted to store the UK pounds in a full reserve manner and exchange it back when presented with poundcoins.

The problems with this are:

1.) You need a banking license to take deposits.

2.) The website might start off as full reserve banking but be tempted in to fraction reserve banking years later.

3.) Running an exchange at 1:1 would lose money.

4.) It is centralised and open to attack.

5.) the issuer of poundcoin will have to be trusted.

So to get round these problems apart from number 5 it has to be a community effort to get poundcoins used and trusted as much as UK pound coins are.

There can be no promise of 1:1 exchange back out in to real UK pounds.

-Basically the system will have to run on pure faith like bitcoin does.

-Poundcoins will always have to undersupply the marketplace to keep demand high.

-Cryptocurrency exchanges everywhere will have to accept that a 1 poundcoin is worth a UK pound.

- The majority of the bitcoin community will have to back the idea.

- There would have to be incredibly strict rules about increasing supply and informing people at least a year in advance that new poundcoins were going to be issued.

- The issuer should ideally be a decentralised computer algorithm to stop corruption and limit supply similar to the bitcoin system itself.

- The standard bitcoin client would need to recognise poundcoins and show them as a separate balance.

So if all of this was to go ahead the next obvious question would be who should get the newly minted poundcoins? Should they be handed out for free to poor people? or by random chance like a lottery?

The purpose of crypto-currency is to allow two parties to engage in commerce without needing to trust a third party. The blockchain and mining is the compromise necessary in order to eliminate the trusted third party (central authority) There is no point in making a cryptocurrency that requires a trusted third party. You can simply have the central authority use an internal accounting ledger and not need to waste any energy on mining, a blockchain, or transaction processing.

There are plenty of digital payment systems which use a trusted central authority. PayPal and Liberty Reserve would be two examples. Without a controlled supply you can't peg to a currency. If demand exceeds supply for "poundcoin" then people will sell them for more than a pound. If supply exceeds demand then they will sell for less than a pound.

2.) The website might start off as full reserve banking but be tempted in to fraction reserve banking years later.

3.) Running an exchange at 1:1 would lose money.

4.) It is centralised and open to attack.

5.) the issuer of poundcoin will have to be trusted.

1) You will not get a banking license, I would bet you a million btc, Did you ever see the documentry "Bank of Dave" They havnt given out a full banking license for like decades.

2) Fractional reserve banking is the work of the devil and the one of the main reasons i'm using bitcoin.

3) Yes it would

4) Yes it is

5) Yes

Why would anyone use poundcoin? it has all the disadvantages of fiat and all the disadvantages of bitcoin (its new and not widely accepted)Why not just provide a UK exchange where I can buy bitcoin via bank transfer, that should be nice and easy in comparison, besides theres not many UK sites where you can do this without a having to mess about with pingit or ID or alike.

What about just printing bitcoin, you can even buy the materials such as peelable holograms from ebay, this will be where the market is when bitcoin is adopted more readily, the majority of most peoples money transactions are not done online, Might not have much margin in it but better than none.

You'd be better off starting a bitcoin building society / credit union type setup, there are early adopters with stashes of bitcoin that might be interested in recieving some interest and sharing the risk of lending.

2.) The website might start off as full reserve banking but be tempted in to fraction reserve banking years later.

3.) Running an exchange at 1:1 would lose money.

4.) It is centralised and open to attack.

5.) the issuer of poundcoin will have to be trusted.

1) You need an e-money license, which is close to a bank license but not the same. A few companies in the EU hold one of these, they don't really sound like bank names though.

2) True, though in my vision this company would have a fractional "hot wallet" and lives from interest created on deposits that are deposited at very conservative funds/accounts. One could also make these public. Having 100% coverage is a requirement for e-money providers I think.

3) How/why? I think paying the actual costs as fees would only be fair and is also allowed accouding to e-money regulations.

4) True, both alt-chain and colored coin approach are risky and reputation is at stake.

5) True as well, kind of. Poundcoins would not be different from GBP, but there's the problem that if you allow anyone to issue them that anyone can do fractional reserve. Exactly because of this there are so many hurdles in creating a bank and getting a license for that, to make sure only few people/institutions can do this legally. E-money providers are not allowed to do that btw.

All in all I also already did a bit of research (though rather with the altchain than colored coin approach) but as you I see that there are serious hurdles in building confidence. Having an official license might help though.

About that "everyone can issue Poundcoins and you hav to trust these" - that's rather the concept of Ripple if I understood it correctly and it should work because you owe people you personally know some money, not some strangers owe to you.

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Mines Gonna Be a decentralised network. i will be offering uk shops and small business in the uk £5 million pound for free as from next month. those shops will then be able to mine the coins and pass on the wallets to their customers whilst selling coins thus distributing the network.

The network will accept is value as same as uk pound. and it looks fantastic in your wallet as a £1 is 1.00 coins. fantastic for micro payments without the need to convert from pound sterling. great for shops and business in uk a coin that has a stable price and no need to convert prices. and eventually a uk network